SM Horngren Cost Accounting 14e Ch18

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CHAPTER 18 SPOILAGE, REWORK, AND SCRAP 18-1 Managers have found that improved quality and intolerance for high spoilage have lowered overall costs and increased sales. 18-2 Spoilage—units of production that do not meet the standards required by customers for good units and that are discarded or sold at reduced prices. Rework—units of production that do not meet the specifications required by customers but which are subsequently repaired and sold as good finished units. Scrap—residual material that results from manufacturing a product. It has low total sales value compared to the total sales value of the product. 18-3 Yes. Normal spoilage is spoilage inherent in a particular production process that arises even under efficient operating conditions. Management decides the spoilage rate it considers normal depending on the production process. 18-4 Abnormal spoilage is spoilage that is not inherent in a particular production process and would not arise under efficient operating conditions. Costs of abnormal spoilage are ―lost costs,‖ measures of inefficiency that should be written off directly as losses for the accounting period. 18-5 Management effort can affect the spoilage rate. Many companies are relentlessly reducing their rates of normal spoilage, spurred on by competitors who, likewise, are continuously reducing costs. 18-6 Normal spoilage typically is expressed as a percentage of good units passing the inspection point. Given actual spoiled units, we infer abnormal spoilage as follows: Abnormal spoilage = Actual spoilage – Normal spoilage. 18-7 Accounting for spoiled goods deals with cost assignment, rather than with cost incurrence, because the existence of spoiled goods does not involve any additional cost beyond the amount already incurred. 18-8 Yes. Normal spoilage rates should be computed from the good output or from the normal input, not the total input. Normal spoilage is a given percentage of a certain output base. This base should never include abnormal spoilage, which is included in total input. Abnormal spoilage does not vary in direct proportion to units produced, and to include it would cause the normal spoilage count to fluctuate irregularly and not vary in direct proportion to the output base. 18-9 Yes, the point of inspection is the key to the assignment of spoilage costs. Normal spoilage costs do not attach solely to units transferred out. Thus, if units in ending work in process have passed inspection, they should have normal spoilage costs added to them. 18-10 No. If abnormal spoilage is detected at a different point in the production cycle than normal spoilage, then unit costs would differ. If, however normal and abnormal spoilage are detected at the same point in the production cycle, their unit costs would be the same.

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18-11 No. Spoilage may be considered a normal characteristic of a given production cycle. The costs of normal spoilage caused by a random malfunction of a machine would be charged as a part of the manufacturing overhead allocated to all jobs. Normal spoilage attributable to a specific job is charged to that job. 18-12 No. Unless there are special reasons for charging normal rework to jobs that contained the bad units, the costs of extra materials, labor, and so on are usually charged to manufacturing overhead and allocated to all jobs. 18-13 Yes. Abnormal rework is a loss just like abnormal spoilage. By charging it to manufacturing overhead, the abnormal rework costs are spread over other jobs and also included in inventory to the extent a job is not complete. Abnormal rework is rework over and above what is expected during a period, and is recognized as a loss for that period. 18-14 A company is justified in inventorying scrap when its estimated net realizable value is significant and the time between storing it and selling or reusing it is quite long. 18-15 Companies measure scrap to measure efficiency and to also control a tempting source of theft. Managers of companies that report high levels of scrap focus attention on ways to reduce scrap and to use the scrap the company generates more profitably. Some companies, for example, might redesign products and processes to reduce scrap. Others may also examine if the scrap can be reused to save substantial input costs. 18-16 (5–10 min.) Normal and abnormal spoilage in units. 1.

2.

Total spoiled units Normal spoilage in units, 5% Abnormal spoilage in units

132,000

Abnormal spoilage, 5,400 $10 Normal spoilage, 6,600 $10 Potential savings, 12,000 $10

12,000 6,600 5,400 $ 54,000 66,000 $120,000

Regardless of the targeted normal spoilage, abnormal spoilage is non-recurring and avoidable. The targeted normal spoilage rate is subject to change. Many companies have reduced their spoilage to almost zero, which would realize all potential savings. Of course, zero spoilage usually means higher-quality products, more customer satisfaction, more employee satisfaction, and various beneficial effects on nonmanufacturing (for example, purchasing) costs of direct materials.

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18-17 (20 min.) Weighted-average method, spoilage, equivalent units. Solution Exhibit 18-17 calculates equivalent units of work done to date for direct materials and conversion costs. SOLUTION EXHIBIT 18-17 Summarize Output in Physical Units and Compute Output in Equivalent Units; Weighted-Average Method of Process Costing with Spoilage, Gray Manufacturing Company for November 2012. (Step 1) Physical Units

Flow of Production Work in process, beginning (given) Started during current period To account for Good units completed and transferred out during current period: Normal spoilage* 100 100%; 100 100% Abnormal spoilage† 50 100%; 50 100% Work in process, ending‡ (given) 2,000 100%; 2,000 30% Accounted for Equivalent units of work done to date

(Step 2) Equivalent Units Direct Conversion Materials Costs

1,000 10,150a 11,150 9,000 100

9,000

9,000

100

100

50

50

50 2,000 2,000

600

11,150 11,150

a

9,750

From below, 11,150 total units are accounted for. Therefore, units started during current period must be = 11,150 – 1,000 = 10,150. *Degree of completion of normal spoilage in this department: direct materials, 100%; conversion costs, 100%. † Degree of completion of abnormal spoilage in this department: direct materials, 100%; conversion costs, 100%. ‡ Degree of completion in this department: direct materials, 100%; conversion costs, 30%.

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18-18 (20 25 min.) Weighted-average method, assigning costs (continuation of 18-17). Solution Exhibit 18-18 summarizes total costs to account for, calculates the costs per equivalent unit for direct materials and conversion costs, and assigns total costs to units completed and transferred out (including normal spoilage), to abnormal spoilage, and to units in ending work in process. SOLUTION EXHIBIT 18-18 Summarize Total Costs to Account For, Compute Cost per Equivalent Unit, and Assign Total Costs to Units Completed, to Spoiled Units, and to Units in Ending Work in Process; Weighted-Average Method of Process Costing, Gray Manufacturing Company, November 2012. Total Production Costs $ 2,533 39,930 $42,463

(Step 3)

Work in process, beginning (given) Costs added in current period (given) Total costs to account for

(Step 4)

Costs incurred to date Divided by equivalent units of work done to date Cost per equivalent unit

Assignment of costs Good units completed and transferred out (9,000 units) Costs before adding normal spoilage Normal spoilage (100 units) (A) Total cost of good units completed & transf. out (B) Abnormal spoilage (50 units) (C) Work in process, ending (2,000 units) (A)+(B)+(C) Total costs accounted for

$

Direct Materials $ 1,423 12,180 $13,603

Conversion Costs $ 1,110 27,750 $28,860

$13,603 11,150 1.22

$28,860 9,750 2.96

$

(Step 5)

$37,620 (9,000# $1.22) + (9,000# $2.96) 418 (100# $1.22) + (100# $2.96) 38,038 (50# $1.22) + (50# $2.96) 209 4,216 (2,000# $1.22) + (600# $2.96) $42,463 $13,603 + $28,860

#

Equivalent units of direct materials and conversion costs calculated in Step 2 in Solution Exhibit 18-17.

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18-19 (15 min.) FIFO method, spoilage, equivalent units. Solution Exhibit 18-19 calculates equivalent units of work done in the current period for direct materials and conversion costs. SOLUTION EXHIBIT 18-19 Summarize Output in Physical Units and Compute Output in Equivalent Units; First-in, First-out (FIFO) Method of Process Costing with Spoilage, Gray Manufacturing Company for November 2012. (Step 1) Physical Units 1,000 10,150a 11,150

(Step 2) Equivalent Units Direct Conversion Materials Costs

Flow of Production Work in process, beginning (given) Started during current period To account for Good units completed and transferred out during current period: From beginning work in process|| 1,000 0 500 1,000 (100% 100%); 1,000 (100% 50%) 8,000# Started and completed 8,000 8,000 8,000 100%; 8,000 100% 100 Normal spoilage* 100 100 100 100%; 100 100% 50 Abnormal spoilage† 50 50 50 100%; 50 100% 2,000 Work in process, ending‡ 2,000 600 ____ 2,000 100%; 2,000 30% 11,150 Accounted for 10,150 9,250 Equivalent units of work done in current period a From below, 11,150 total units are accounted for. Therefore, units started during current period must be 11,150 – 1,000 = 10,150. || Degree of completion in this department: direct materials, 100%; conversion costs, 50%. # 9,000 physical units completed and transferred out minus 1,000 physical units completed and transferred out from beginning work-in-process inventory. *Degree of completion of normal spoilage in this department: direct materials, 100%; conversion costs, 100%. † Degree of completion of abnormal spoilage in this department: direct materials, 100%; conversion costs, 100%. ‡ Degree of completion in this department: direct materials, 100%; conversion costs, 30%.

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18-20 (20 25 min.) FIFO method, assigning costs (continuation of 18-19). Solution Exhibit 18-20 summarizes total costs to account for, calculates the costs per equivalent unit for direct materials and conversion costs, and assigns total costs to units completed and transferred out (including normal spoilage), to abnormal spoilage, and to units in ending work in process. SOLUTION EXHIBIT 18-20 Summarize Total Costs to Account For, Compute Cost per Equivalent Unit, and Assign Total Costs to Units Completed, to Spoiled Units, and to Units in Ending Work in Process; FIFO Method of Process Costing, Gray Manufacturing Company, November 2012. Total Production Costs $ 2,533 39,930 $42,463

(Step 3) Work in process, beginning (given) Costs added in current period (given) Total costs to account for (Step 4) Costs added in current period Divided by equivalent units of work done in current period Cost per equivalent unit (Step 5) Assignment of costs: Good units completed and transferred out (9,000 units) Work in process, beginning (1,000 units) Costs added to beg. work in process in current period Total from beginning inventory before normal spoilage Started and completed before normal spoilage (8,000 units) Normal spoilage (100 units) (A) Total costs of good units completed and transferred out (B) Abnormal spoilage (50 units) (C) Work in process, ending (2,000 units) (A)+(B)+(C) Total costs accounted for a

Direct Materials $ 1,423 12,180 $13,603

Conversion Costs $ 1,110 27,750 $28,860

$12,180 10,150 1.20

$27,750 9,250 $ 3

$

$ 2,533 1,500

$1,423 + (0a $1.20) +

$1,110 (500a $3)

4,033 a a 33,600 (8,000 $1.20) + (8,000 $3) a a $3) 420 (100 $1.20) + (100 38,053 210 (50a $1.20) + (50a $3) a 4,200 (2,000 $1.20) + (600a $3) $42,463 $13,603 + $28,860

Equivalent units of direct materials and conversion costs calculated in Step 2 in Solution Exhibit 18-19.

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18-21 (35 min.) Weighted-average method, spoilage. 1. Solution Exhibit 18-21A calculates equivalent units of work done in the current period for direct materials and conversion costs. SOLUTION EXHIBIT 18-21A Summarize Output in Physical Units and Compute Output in Equivalent Units; Weighted-Average Method of Process Costing with Spoilage, Appleton Company for August 2012. (Step 1)

(Step 2) Equivalent Units Physical Direct Conversion Units Materials Costs

Flow of Production

Work in process, beginning (given) 2,000 Started during current period (given) 10,000 To account for 12,000 Good units completed and tsfd. out during current period: 9,000 a Normal spoilage 900 (900 100%; 900 100%) Abnormal spoilageb 300 (300 100%; 300 100%) Work in process, endingc (given) 1,800 (1,800 100%; 1,800 75%) ______ Accounted for 12,000 Equivalent units of work done to date

9,000

9,000

900

900

300

300

1,800 _____ 12,000

1,350 _____ 11,550

a

Normal spoilage is 10% of good units transferred out: 10% × 9,000 = 900 units. Degree of completion of normal spoilage

in this department: direct materials, 100%; conversion costs, 100%. b Total spoilage = Beg. units + Units started - Good units transferred out – Ending units = 2,000 + 10,000 - 9,000 - 1,800 = 1,200; Abnormal spoilage = Total spoilage – Normal spoilage = 1,200 – 900 = 300 units. Degree of completion of abnormal spoilage in this department: direct materials, 100%; conversion costs, 100%. c Degree of completion in this department: direct materials, 100%; conversion costs, 75%.

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2. Solution Exhibit 18-21B summarizes total costs to account for, calculates the costs per equivalent unit for direct materials and conversion costs, and assigns total costs to units completed and transferred out (including normal spoilage), to abnormal spoilage, and to units in ending work in process, using the weighted-average method. SOLUTION EXHIBIT 18-21B Summarize Total Costs to Account For, Compute Cost per Equivalent Unit, and Assign Total Costs to Units Completed, to Spoiled Units, and to Units in Ending Work in Process; Weighted-Average Method of Process Costing, Appleton Company, August 2012. Total Production Costs $ 28,600 174,300 $202,900

(Step 3)

Work in process, beginning (given) Costs added in current period (given) Total costs to account for

(Step 4)

Costs incurred to date Divide by equivalent units of work done to date Cost per equivalent unit

(Step 5)

(A) (B) (C) (A) + (B) + (C)

Assignment of costs Good units completed and transferred out (9,000 units) Costs before adding normal spoilage Normal spoilage (900 units) Total costs of good units completed and transferred out Abnormal spoilage (300 units) Work in process, ending (1,800 units): Total costs accounted for

Direct Materials $17,700 81,300 $99,000

Conversion Costs $ 10,900 93,000 $103,900

$99,000 12,000

$103,900 ÷11,550 $ 8.9957

$ 8.250

$155,211 15,521 170,732 5,174 26,994 $202,900

(9,000d (900d

$8.25) + (9,000 d $8.9957) $8.25) + (900d $8.9957)

(300d $8.25) + (300d $8.9957) (1,800d $8.25) + (1,350d $8.9957) $99,000 + $103,900

d

Equivalent units of direct materials and conversion costs calculated in step 2 of Solution Exhibit 18-21A.

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18-22 (10 min.) Standard costing method, spoilage, journal entries. Spoilage represents the amount of resources that go into the process, but do not result in finished product. A simple way to account for spoilage in process costing is to calculate the amount of direct material that was spoiled. The journal entry to record the spoilage incurred in Jordan’s production process is: Manufacturing overhead control (normal spoilage) Work-in-process inventory (cost of spoiled sheet metal)

475 475

18-23 (15 min.) Recognition of loss from spoilage. 1. The unit cost of making the 8,000 units is: $320,000 ÷ 8,000 units = $40 per unit 2. The total cost of the 300 spoiled units is: $40 × 300 units = $12,000 3. The increase in the per-unit cost of goods sold as a result of the normal spoilage is: $12,000 ÷ 7,700 good units = $1.56 Unit cost of goods sold for units remaining after the spoilage = $40 + $1.56 = $41.56. (Or $320,000 ÷ 7,700 = $41.56) 4. The $12,000 cost for the 300 spoiled units is taken out of manufacturing costs and expensed in the period of the spoilage. The journal entry to record the abnormal spoilage incurred is: Loss from abnormal spoilage 12,000 Work-in-process control 12,000

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18-24 (25 min.) Weighted-average method, spoilage. 1. Solution Exhibit 18-24, Panel A, calculates the equivalent units of work done to date for each cost category in September 2011. 2. Solution Exhibit 18-24, Panel B, summarizes total costs to account for, calculates the costs per equivalent unit for each cost category, and assigns total costs to units completed (including normal spoilage), to abnormal spoilage, and to units in ending work in process using the weighted-average method. SOLUTION EXHIBIT 18-24 Weighted-Average Method of Process Costing with Spoilage; Chipcity, September 2011. PANEL A: Steps 1 and 2—Summarize Output in Physical Units and Compute Output in Equivalent Units (Step 1) Physical Units 600 2,550 3,150

Flow of Production Work in process, beginning (given) Started during current period (given) To account for Good units completed and transferred out during current period: Normal spoilage* 315 100%; 315 100% Abnormal spoilage† 285 100%; 285 100% Work in process, ending‡ (given) 450 100%; 450 40% Accounted for Equivalent units of work done to date

2,100 315

(Step 2) Equivalent Units Direct Conversion Materials Costs

2,100

2,100

315

315

285

285

450

180

285 450 3,150 3,150

2,880

*Normal spoilage is 15% of good units transferred out: 15%

2,100 = 315 units. Degree of completion of normal spoilage in this department: direct materials, 100%; conversion costs, 100%. † Total spoilage = 600 + 2,550 – 2,100 – 450 = 600 units; Abnormal spoilage = Total spoilage Normal spoilage = 600 315 = 285 units. Degree of completion of abnormal spoilage in this department: direct materials, 100%; conversion costs, 100%. ‡ Degree of completion in this department: direct materials, 100%; conversion costs, 40%.

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SOLUTION EXHIBIT 18-24 PANEL B: Steps 3, 4, and 5— Summarize Total Costs to Account For, Compute Cost per Equivalent Unit, and Assign Total Costs to Units Completed, to Spoiled Units, and to Units in Ending Work in Process

(Step 3)

Work in process, beginning (given) Costs added in current period (given) Total costs to account for

(Step 4)

Costs incurred to date Divided by equivalent units of work done to date Cost per equivalent unit

Assignment of costs Good units completed and transferred out (2,100 units) Costs before adding normal spoilage Normal spoilage (315 units) (A) Total cost of good units completed and transferred out (B) Abnormal spoilage (285 units) (C) Work-in-process, ending (450 units) (A)+(B)+(C) Total costs accounted for

Total Production Costs $111,300 797,400 $908,700

Direct Materials $ 96,000 567,000 $663,000

Conversion Costs $ 15,300 230,400 $245,700

$663,000 3,150 $210.476

$245,700 2,880 $85.3125

(Step 5)

#

$621,156 (2,100# $210.476) + (2,100# $85.3125) 93,173 (315# $210.476) + (315# $85.3125) 714,329 # # 84,300 (285 $210.476) + (285 $85.3125) # # 110,071 (450 $210.476) + (180 $85.3125) $908,700 $663,000 $245,700

Equivalent units of direct materials and conversion costs calculated in Step 2 in Panel A.

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18-25 (25 min.) FIFO method, spoilage. 1. Solution Exhibit 18-25, Panel A, calculates the equivalent units of work done in the current period for each cost category in September 2011. 2. Solution Exhibit 18-25, Panel B, summarizes Chipcity’s production costs for September 2011, calculates the costs per equivalent unit for each cost category, and assigns total costs to units completed and transferred out (including normal spoilage), to abnormal spoilage, and to units in ending work in process under the FIFO method. SOLUTION EXHIBIT 18-25 First-in, First-out (FIFO) Method of Process Costing with Spoilage; Chipcity, September 2011. PANEL A: Steps 1 and 2—Summarize Output in Physical Units and Compute Output in Equivalent Units (Step 2) (Step 1) Equivalent Units Physical Direct Conversion Flow of Production Units Materials Costs Work in process, beginning (given) 600 Started during current period (given) 2,550 To account for 3,150 Good units completed and transferred out during current period: From beginning work in process|| 600 0 420 600 (100% 100%); 600 (100% 30%) 1,500# Started and completed 1,500 1,500 1,500 100%; 1,500 100% 315 Normal spoilage* 315 315 315 100%; 315 100% † 285 Abnormal spoilage 285 285 285 100%; 285 100% ‡ 450 Work in process, ending 450 180 450 100%; 450 40% 3,150 Accounted for 2,550 2,700 Equivalent units of work done in current period ||

Degree of completion in this department: direct materials, 100%; conversion costs, 30%. 2,100 physical units completed and transferred out minus 600 physical units completed and transferred out from beginning work in process inventory. *Normal spoilage is 15% of good units transferred out: 15% 2,100 = 315 units. Degree of completion of normal spoilage in this department: direct materials, 100%; conversion costs, 100%. † Abnormal spoilage = Actual spoilage Normal spoilage = 600 315 = 285 units. Degree of completion of abnormal spoilage in this department: direct materials, 100%; conversion costs, 100%. ‡ Degree of completion in this department: direct materials, 100%; conversion costs, 40%. #

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SOLUTION EXHIBIT 18-25 PANEL B: Steps 3, 4 and 5— Summarize Total Costs to Account For, Compute Cost per Equivalent Unit, and Assign Total Costs to Units Completed, to Spoiled Units, and to Units in Ending Work in Process Total Production Costs $111,300 797,400 $908,700

(Step 3)

Work in process, beginning (given) Costs added in current period (given) Total costs to account for

(Step 4)

Costs added in current period Divided by equivalent units of work done in current

period

Direct Materials $ 96,000 567,000 $663,000

Conversion Costs $ 15,300 230,400 $245,700

$567,000 2,550 $222.353

$230,400 2,700 $ 85.333

Cost per equivalent unit (Step 5)

Assignment of costs: Good units completed and transferred out (2,100 units) Work in process, beginning (600 units) Costs added to beg. work in process in current period Total from beginning inventory before normal spoilage Started and completed before normal spoilage (1,500 units) Normal spoilage (315 units) (A) Total costs of good units completed and transferred out (B) Abnormal spoilage (285 units) (C) Work in process, ending (450 units) (A)+(B)+(C) Total costs accounted for §

$111,300 35,840

(0§

$96,000 + $15,300 $222.353) + (420§ $85.333)

147,140 461,529 96,921

(1,500§ $222.353)+(1,500§ $85.333) (315§ $222.353) + (315§ $85.333)

705,590 87,691 115,419 $908,700

(285§ $222.353) + (285§ $85.333) (450§ $222.353) + (180§ $85.333) $663,000 + $245,700

Equivalent units of direct materials and conversion costs calculated in Step 2 in Panel A.

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18-26 (30 min.) Standard-costing method, spoilage. 1. Solution Exhibit 18-25, Panel A, shows the computation of the equivalent units of work done in September 2011 for direct materials (2,550 units) and conversion costs (2,700 units). (This computation is the same for FIFO and standard-costing.) 2. The direct materials cost per equivalent unit of beginning work in process and of work done in September 2011 is the standard cost of $200 given in the problem. The conversion cost per equivalent unit of beginning work in process and of work done in September 2011 is the standard cost of $75 given in the problem. Solution Exhibit 18-26 summarizes the total costs to account for, and assigns these costs to units completed (including normal spoilage), to abnormal spoilage, and to units in ending work in process using the standard costing method. SOLUTION EXHIBIT 18-26 Standard Costing Method of Process Costing with Spoilage; Chipcity, September 2011. Steps 3, 4, and 5—Summarize Total Costs to Account For, Compute Cost per Equivalent Unit, and Assign Total Costs to Units Completed, to Spoiled Units, and to Units in Ending Work in Process

(Step 3) Work in process, beginning* Costs added in current period at standard prices Costs to account for

Total Production Costs $133,500 712,500 $846,000

(Step 4) Standard costs per equivalent unit (given)

$

(Step 5) Assignment of costs at standard costs: Good units completed and transferred out (2,100 units) Work in process, beginning (600 units)* Costs added to beg. work in process in current period Total from beginning inventory before normal spoilage Started and completed before normal spoilage (1,500 units) Normal spoilage (315 units) (A) Total costs of good units completed and transferred out (B) Abnormal spoilage (285 units) (C) Work in process, ending (450 units) (A)+(B)+(C) Total costs accounted for

275

$133,500 31,500

Direct Materials (600 $200) (2,550 $200) $630,000 $

200

(600 (0§

$200) $200)

Conversion Costs (180 $75) (2,700

$75)

$216,000 $

+ +

75

(180 $75) (420§ $75)

165,000 412,500 (1,500§ $200) + (1,500§ $75) 86,625 (315§ $200) + (315§ $75) 664,125 78,375 103,500 $846,000

(285§ (450§

$200) + $200) +

$630,000

+

(285§ (180§

$75) $75)

$216,000

*

Work in process, beginning has 600 equivalent units (600 physical units 100%) of direct materials and 180 equivalent units (600 physical units 30%) of conversion costs. § Equivalent units of direct materials and conversion costs calculated in Step 2 in Solution Exhibit 18-25, Panel A.

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18-27 (20–30 min.) Spoilage and job costing. 1.

Cash Loss from Abnormal Spoilage Work-in-Process Control Loss = ($9.00 420) – $420 = $3,360

420 3,360 3,780

Remaining cases cost = $9.00 per case. The cost of these cases is unaffected by the loss from abnormal spoilage. 2.

a.

Cash

840 Work-in-Process Control

840

The cost of the remaining good cases = [($9.00 2,100) – $840] = $18,060 The unit cost of a good case now becomes $18,060 1,680 = $10.75 b.

Cash Manufacturing Department Overhead Control Work-in-Process Control

840 2,940 3,780

The unit cost of a good case remains at $9.00.

3.

c.

The unit costs in 2a and 2b are different because in 2a the normal spoilage cost is charged as a cost of the job which has exacting job specifications. In 2b however, normal spoilage is due to the production process, not the particular attributes of this specific job. These costs are, therefore, charged as part of manufacturing overhead and the manufacturing overhead cost of $2 per case already includes a provision for normal spoilage.

a.

Work-in-Process Control Materials Control, Wages Payable Control, Manufacturing Overhead Allocated

420 420

The cost of the good cases = [($9.00 2,100) + $420] = $19,320 The unit cost of a good case is $19,320 2,100 = $9.20 b.

Manufacturing Department Overhead Control Materials Control, Wages Payable Control, Manufacturing Overhead Allocated The unit cost of a good case = $9.00 per case c.

420 420

The unit costs in 3a and 3b are different because in 3a the normal rework cost is charged as a cost of the job which has exacting job specifications. In 3b however, normal rework is due to the production process, not the particular attributes of this specific job. These costs are, therefore, charged as part of manufacturing overhead and the manufacturing overhead cost of $2 per case already includes a provision for this normal rework.

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18-28 (15 min.) Reworked units, costs of rework. 1.

The two alternative approaches to account for the materials costs of reworked units are: a. To charge the costs of rework to the current period as a separate expense item as abnormal rework. This approach would highlight to White Goods the costs of the supplier problem. b. To charge the costs of the rework to manufacturing overhead as normal rework.

2. The $50 tumbler cost is the cost of the actual tumblers included in the washing machines. The $44 tumbler units from the first supplier were eventually never used in any washing machine, and that supplier is now bankrupt. The units have now been disposed of at zero disposal value. 3.

The total costs of rework due to the defective tumbler units include the following: a. the labor and other conversion costs spent on substituting the new tumbler units; b. the costs of any extra negotiations to obtain the replacement tumbler units; c. any higher price the existing supplier may have charged to do a rush order for the replacement tumbler units; and d. ordering costs for the replacement tumbler units.

18-16 © 2012 Pearson Education, Inc. Publishing as Prentice Hall. SM Cost Accounting 14/e by Horngren

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18-29 (25 min.) Scrap, job costing. 1. Journal entry to record scrap generated by a specific job and accounted for at the time scrap is sold is: Cash or Accounts Receivable Work-in-Process Control To recognize asset from sale of scrap. A memo posting is also made to the specific job record.

520 520

2. Scrap common to various jobs and accounted for at the time of its sale can be accounted for in two ways: a. Regard scrap sales as a separate line item of revenues (the method generally used when the dollar amount of scrap is immaterial): Cash or Accounts Receivable Scrap Revenues To recognize revenue from sale of scrap.

4,400 4,400

b. Regard scrap sales as offsets against manufacturing overhead (the method generally used when the dollar amount of scrap is material): Cash or Accounts Receivable Manufacturing Department Overhead Control To record cash raised from sale of scrap.

4,400 4,400

3. Journal entry to record scrap common to various jobs at the time scrap is returned to storeroom: Materials Control 4,400 Manufacturing Department Overhead Control 4,400 To record value of scrap returned to storeroom. When the scrap is reused as direct material on a subsequent job, the journal entry is: Work-in-Process Control 4,400 Materials Control 4,400 To record reuse of scrap on a job. Explanations of journal entries are provided here but are not required.

18-17 © 2012 Pearson Education, Inc. Publishing as Prentice Hall. SM Cost Accounting 14/e by Horngren

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18-30 (30 min.) Weighted-average method, spoilage. Solution Exhibit 18-30 summarizes total costs to account for, calculates the equivalent units of work done to date for each cost category, and assigns total costs to units completed (including normal spoilage), to abnormal spoilage, and to units in ending work in process using the weighted-average method. SOLUTION EXHIBIT 18-30 Weighted-Average Method of Process Costing with Spoilage; Cleaning Department of the Boston Company for May. PANEL A: Steps 1 and 2—Summarize Output in Physical Units and Compute Output in Equivalent Units (Step 1) Physical Units 3,000 25,000 28,000

Flow of Production Work in process, beginning (given) Started during current period (given) To account for Good units completed and transferred out during current period: Normal spoilage* 2,050 100%; 2,050 100% Abnormal spoilage† 1,250 100%; 1,250 100% Work in process, ending‡ (given) 4,200 100%; 4,200 30% Accounted for Equivalent units of work done to date

(Step 2) Equivalent Units Direct Conversion Materials Costs

20,500

20,500

20,500

2,050

2,050

2,050

1,250

1,250

1,250

4,200

4,200

1,260

28,000

28,000

25,060

*Normal spoilage is 10% of good units transferred out: 10% 20,500 = 2,050 units. Degree of completion of normal spoilage in this department: direct materials, 100%; conversion costs, 100%. † Total spoilage = 3000 + 25,000 – 20,500 – 4,200 = 3,300 units; Abnormal spoilage = 3,300 – 2,050 = 1,250 units. Degree of completion of abnormal spoilage in this department: direct materials, 100%; conversion costs, 100%. ‡ Degree of completion in this department: direct materials, 100%; conversion costs, 30%.

18-18 © 2012 Pearson Education, Inc. Publishing as Prentice Hall. SM Cost Accounting 14/e by Horngren

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SOLUTION EXHIBIT 18-30 PANEL B: Steps 3, 4, and 5— Summarize Total Costs to Account For, Compute Cost per Equivalent Unit, and Assign Total Costs to Units Completed, to Spoiled Units, and to Units in Ending Work in Process Total Production Costs $ 7,200 83,466 $90,666

(Step 3)

Work in process, beginning (given) Costs added in current period (given) Total costs to account for

(Step 4)

Costs incurred to date Divided by equivalent units of work done to date Cost per equivalent unit

(Step 5)

Direct Materials $ 4,500 46,250 $50,750

Conversion Costs $ 2,700 37,216 $39,916

$50,750 28,000

$39,916 25,060 $1.5928

$1.8125

Assignment of costs Good units completed and transferred out (20,500 units)

Costs before adding normal spoilage Normal spoilage (2,050 units) (A) Total costs of good units completed and transferred out (B) Abnormal spoilage (1,250 units) (C) Work in process, ending (4,200 units) (A)+(B)+(C) Total costs accounted for

# # $69,809 (20,500 1.8125) + (20,500 1.5928) # # 6,981 (2,050 1.8125) + (2,050 1.5928)

76,790 4,257 9,619 $90,666

(1,250# 1.8125) + (4,200# 1.8125) + $50,750 +

(1,250# 1.5928) (1,260# 1.5928) $39,916

*These numbers are all calculated using the unit costs carried out to three decimal places. #

Equivalent units of direct materials and conversion costs calculated in Step 2 in Panel A above.

18-19 © 2012 Pearson Education, Inc. Publishing as Prentice Hall. SM Cost Accounting 14/e by Horngren

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18-31 (25 min.) FIFO method, spoilage. For the Cleaning Department, Solution Exhibit 18-31 summarizes the total costs for May, calculates the equivalent units of work done in the current period for direct materials and conversion costs, and assigns total costs to units completed and transferred out (including normal spoilage), to abnormal spoilage, and to units in ending work in process under the FIFO method. SOLUTION EXHIBIT 18-31 First-in, First-out (FIFO) Method of Process Costing with Spoilage; Cleaning Department of the Boston Company for May. PANEL A: Steps 1 and 2—Summarize Output in Physical Units and Compute Output in Equivalent Units

Flow of Production Work in process, beginning (given) Started during current period (given) To account for Good units completed and transferred out during current period: From beginning work in process|| 3,000 (100% 100%); 3,000 (100% 60%) Started and completed 17,500 100%; 17,500 100% Normal spoilage* 2,050 100%; 2,050 100% Abnormal spoilage† 1,250 100%; 1,250 100% Work in process, ending‡ 4,200 100%; 4,200 30% Accounted for Equivalent units of work done in current period

(Step 1) Physical Units 3,000 25,000 28,000

(Step 2) Equivalent Units Direct Conversion Materials Costs

3,000 0

1200

17,500# 17,500

17,500

2,050

2,050

1,250

1,250

4,200

1,260

25,000

23,260

2,050 1,250 4,200 28,000

||

Degree of completion in this department: direct materials, 100%; conversion costs, 60%. 20,500 physical units completed and transferred out minus 3,000 physical units completed and transferred out from beginning work-in-process inventory. *Normal spoilage is 10% of good units transferred out: 10% 20,500 = 2,050 units. Degree of completion of normal spoilage in this department: direct materials, 100%; conversion costs, 100%. † Total spoilage = = 3000 + 25,000 – 20,500 – 4,200 = 3,300 units; Abnormal spoilage = 3,300 – 2,050 = 1,250 units. Degree of completion of abnormal spoilage in this department: direct materials, 100%; conversion costs, 100%. ‡ Degree of completion in this department: direct materials, 100%; conversion costs, 30%. #

18-20 © 2012 Pearson Education, Inc. Publishing as Prentice Hall. SM Cost Accounting 14/e by Horngren

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SOLUTION EXHIBIT 18-31 PANEL B: Steps 3, 4, and 5— Summarize Total Costs to Account For, Compute Cost per Equivalent Unit, and Assign Total Costs to Units Completed, to Spoiled Units, and to Units in Ending Work in Process Total Production Costs $ 7,200 83,466 $90,666

(Step 3)

Work in process, beginning (given) Costs added in current period (given) Total costs to account for

(Step 4)

Costs added in current period Divided by equivalent units of work done in current period Cost per equivalent unit

Assignment of costs: Good units completed and transferred out (20,500 units) Work in process, beginning (3000 units) Costs added to beg. work in process in current period Total from beginning inventory before normal spoilage Started and completed before normal spoilage (17,500 units) Normal spoilage (2,050 units) (A) Total costs of good units completed and transferred out (B) Abnormal spoilage (1,250 units) (C) Work in process, ending (4,200 units) (A)+(B)+(C) Total costs accounted for

Direct Materials $ 4,500 46,250 $50,750

Conversion Costs $ 2,700 37,216 $39,916

$46,250 25,000 $ 1.85

$37,216 23,260 1.60

$

(Step 5)

§

$ 7,200 1,920 9,120 60,375 7,073 76,568 4,312 9,786 $90,666

$4,500 + $2,700 (0§ $1.85) + (1200§ 1.6) (17,500§ 1.85) + (17,500§ 1.6) (2,050§ 1.85) + (2,050§ 1.6) (1,250§ 1.85) + (1,250§ 1.6) (4,200§ 1.85) + (1,260§ 1.6) $50,750 + $39,916

Equivalent units of direct materials and conversion costs calculated in Step 2 in Panel A.

18-21 © 2012 Pearson Education, Inc. Publishing as Prentice Hall. SM Cost Accounting 14/e by Horngren

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18-32 30).

(35 min.) Weighted-average method, Packaging Department (continuation of 18-

For the Packaging Department, Solution Exhibit 18-32 summarizes total costs to account for, calculates the equivalent units of work done to date for each cost category, and assigns costs to units completed (including normal spoilage), to abnormal spoilage, and to units in ending work in process using the weighted-average method. SOLUTION EXHIBIT 18-32 Weighted-Average Method of Process Costing with Spoilage; Packaging Department of the Boston Company for May. PANEL A: Steps 1 and 2—Summarize Output in Physical Units and Compute Output in Equivalent Units (Step 1)

Flow of Production Work in process, beginning (given) Started during current period (given) To account for Good units completed and transferred out during current period: Normal spoilage* 1760 100%; 1,760 100%; 1,760 100% Abnormal spoilage† 240 100%; 240 100%, 240 100% Work in process, ending‡ (given) 7,000 100%; 7,000 0%; 7,000 40% Accounted for Equivalent units of work done to date

Physical Units 10,500 20,500 31,000 22,000 1,760

(Step 2) Equivalent Units TransferredDirect Conversion in Costs Materials Costs

22,000

22,000

22,000

1,760

1,760

1,760

240 240

240

240

7,000 7,000 31,000 31,000

0 ______ 24,000

2,800 _____ 26,800

*Normal spoilage is 8% of good units transferred out: 8% 22,000 = 1,760 units. Degree of completion of normal spoilage in this department: transferred-in costs, 100%; direct materials, 100%; conversion costs, 100%. † Total spoilage =10,500 + 20,500 – 22,000 – 7,000 = 2,000 units. Abnormal spoilage = 2,000 – 1,760 = 240 units. Degree of completion of abnormal spoilage in this department: transferred-in costs, 100%; direct materials, 100%; conversion costs, 100%. ‡ Degree of completion in this department: transferred-in costs, 100%; direct materials, 0%; conversion costs, 40%.

18-22 © 2012 Pearson Education, Inc. Publishing as Prentice Hall. SM Cost Accounting 14/e by Horngren

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SOLUTION EXHIBIT 18-32 PANEL B: Steps 3, 4, and 5— Summarize Total Costs to Account For, Compute Cost per Equivalent Unit, and Assign Total Costs to Units Completed, to Spoiled Units, and to Units in Ending Work in Process Total Production Transferred-in Costs costs (Step 3)

(Step 4)

Work in process, beginning (given) Costs added in current period (given) Total costs to account for

$ 54,160 120,490 $174,650

Costs incurred to date Divided by equivalent units of work done to date Cost per equivalent unit

Assignment of costs Good units completed and transferred out (22,000 units) Costs before adding normal spoilage Normal spoilage (1,760 units) (A) Total cost of good units completed and transferred out (B) Abnormal spoilage (240 units) (C) Work in process, ending (7,000 units) (A)+(B)+(C)Total costs accounted for

Direct Materials

$ 39,460 76,790* $116,250

$

$

0 4,800 4,800

$14,700 38,900 $53,600

4,800 24,000 0.20

53,600 26,800 2.00

$

116,250 31,000 3.75 $

Conversion Costs

$

(Step 5)

$130,900 10,472

22,000# 1,760#

($3.75 + $0.20 + $2) ($3.75 + $0.20 + $2)

141,372 1,428 240# ($3.75 + $0.20 + $2) # 31,850 (7,000 $3.75) + (0# $0.20) + (2,800# $2) $174,650 $116,250 + $4,800 + $53,600

*Total costs of good units completed and transferred out in Panel B (Step 5) of Solution Exhibit 18-30. # Equivalent units of direct materials and conversion costs calculated in Step 2 in Panel A above.

18-23 © 2012 Pearson Education, Inc. Publishing as Prentice Hall. SM Cost Accounting 14/e by Horngren

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18-33 (25 min.) FIFO method, Packaging Department (continuation of 18-31). Solution Exhibit 18-33 summarizes the total Packaging Department costs for May, shows the equivalent units of work done in the Packaging Department in the current period for transferredin costs, direct materials, and conversion costs, and assigns total costs to units completed and transferred out (including normal spoilage), to abnormal spoilage, and to units in ending workin-process under the FIFO method. SOLUTION EXHIBIT 18-33 First-in, First-out (FIFO) Method of Process Costing with Spoilage; Packaging Department of the Boston Company for May. PANEL A: Steps 1 and 2—Summarize Output in Physical Units and Compute Output in Equivalent Units

Flow of Production Work in process, beginning (given) Started during current period (given) To account for Good units completed and transferred out during current period: From beginning work in process|| 10,500 (100% 100%); 10,500 (100% 0%); 10,500 (100% 70%) Started and completed 11,500 100%; 11,500 100%; 11,500 100% Normal spoilage* 1,760 100%; 1,760% 100%; 1,760 100% Abnormal spoilage† 240 100%; 240 100%; 240 100% Work in process, ending‡ 7,000 100%; 7,000 0%; 7,000 40% Accounted for Equivalent units of work done in current period

(Step 1) Physical Units 10,500 20,500 31,000

(Step 2) Equivalent Units TransferredDirect Conversion in Costs Materials Costs

10,500 0

10,500

3,150

11,500

11,500

11,500

1,760

1,760

1,760

11,500#

1,760

240 240

240

240

7,000 7,000

0

2,800

20,500

24,000

19,450

31,000

||

Degree of completion in this department: transferred-in costs, 100%; direct materials, 0%; conversion costs, 70%. 22,000 physical units completed and transferred out minus 10,500 physical units completed and transferred out from beginning work-in-process inventory. *Normal spoilage is 8% of good units transferred out: 8% 22,000 = 1,760 units. Degree of completion of normal spoilage in this department: transferred-in costs, 100%; direct materials, 100%; conversion costs, 100%. † Total spoilage = 10,500 + 20,500 – 22,000 – 7,000 = 2,000 units. Abnormal spoilage = 2,000 – 1,760 = 240 units. Degree of completion of abnormal spoilage in this department: transferred-in costs, 100%; direct materials, 100%; conversion costs, 100%. ‡ Degree of completion in this department: transferred-in costs, 100%; direct materials, 0%; conversion costs, 40%. #

18-24 © 2012 Pearson Education, Inc. Publishing as Prentice Hall. SM Cost Accounting 14/e by Horngren

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SOLUTION EXHIBIT 18-33 PANEL B: Steps 3, 4, and 5— Summarize Total Costs to Account For, Compute Cost per Equivalent Unit, and Assign Total Costs to Units Completed, to Spoiled Units, and to Units in Ending Work in Process Total Production Costs (Step 3)

(Step 4)

Work in process, beginning (given) Costs added in current period (given) Total costs to account for

$ 54,160 120,268 $174,428

Costs added in current period Divided by equivalent units of work done in current period Cost per equivalent unit

Assignment of costs: Good units completed and transferred out (22,000 units) Work in process, beginning (10,500 units) Costs added to beg. work in process in current period Total from beginning inventory before normal spoilage Started and completed before normal spoilage (11,500 units) Normal spoilage (1,760 units) (A) Total costs of good units completed and transferred out (B) Abnormal spoilage (240 units) (C) Work in process, ending (7,000 units) (A)+(B)+(C) Total costs accounted for

Transferredin Costs $ 39,460 76,568* $116,028

$

$ 76,568 20,500 3.735

Direct Materials $

Conversion Costs

0 4,800 4,800

$14,700 38,900 $53,600

$4,800 ÷24,000 $ 0.20

$38,900 19,450 $ 2

$

(Step 5)

$54,160 8,400

$39,640 +

$0

+

$14,700

(0 $3.735) + (10,500§ 0.20)+(3,150§ $2)

62,560 68,253 10,446 141,259 1,424 31,745 $174,428

11,500§ 1,760§

($3.735 + $0.20 + $2) ($3.735 + $0.20 + $2)

240§ ($3.735 + $0.20 + $2) (7,000§ $3.735)+(0§ $0.20)+(2,800§ $2) $116,028 + $4,800 + $53,600

*Total costs of good units completed and transferred out in Step 5 Panel B of Solution Exhibit 18-31. § Equivalent units of direct materials and conversion costs calculated in Step 2 in Panel A.

18-25 © 2012 Pearson Education, Inc. Publishing as Prentice Hall. SM Cost Accounting 14/e by Horngren

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18-34 (20 25 min.) Job-costing spoilage and scrap. If the scrap sale is material, then it will reduce the costs of the job by 200 lb × $3 = $600 Total costs of the job are $240,000 +$620,000 + $620,000 150% = $1,790,000 Unit cost of the job is $1,790,000/100,000 units = $17.90

a. Cost of job Less: Abnormal spoilage (10,000 units × $17.90) Less: Revenue from scrap Total cost of job

$1,790,000 (179,000) (600) $1,610,400

So Gross Margin will be: Sales $2,000,000 Cost of job 1,610,400 Gross margin $ 389,600 b. Cost of job Less: Abnormal spoilage (2,800* units × $17.90) Less: Revenue from scrap Total cost of job

$1,790,000 (50,120) (600) $1,739,280

So Gross Margin will be: Sales $2,000,000 Cost of job 1,739,280 Gross margin $ 260,720 *In this case the normal spoilage is 8% of 90,000 good units = 7,200 units. Cost of normal spoilage is included in the job cost. Abnormal units are 10,000 – 7,200 = 2,800 units c. Cost of job Less: Abnormal spoilage (0** units ×$17.90) Less: Revenue from scrap Total cost of job

$1,790,000 (0) (600) $1,789,400

So Gross Margin will be: Sales $2,000,000 Cost of job 1,789,400 Gross margin $ 210,600 ** If normal spoilage is 12% of 90,000 = 10,800 units, then all 10,000 spoiled units for this job are considered normal spoilage. This is all part of the cost of the job. 2. If scrap sales were considered immaterial, they would be reported separately as scrap revenue, and the gross margin for this job would decrease by $600 in all three cases above.

18-26 © 2012 Pearson Education, Inc. Publishing as Prentice Hall. SM Cost Accounting 14/e by Horngren

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18-35 (15 min.) Spoilage in job costing 1. Normal spoilage rate= Units of normal spoilage ÷ Total good units completed = 7 ÷ 25 = 28%. 2. a) Journal entry for spoilage related to a specific job: Materials Control (spoiled goods at current disposal value) 7 × $230 Work-in-Process Control (Job #10)

1,610 1,610

Note: The costs incurred on the bad units (7 × $1,450) are already part of the balance in WIP. The cost of the 25 good units is (25 × 1,450) + (7 × $1,220) = $44,790 b) Journal entry for spoilage common to all jobs: Materials Control (spoiled goods at current disposal value) 7 × $230 Manufacturing Overhead Control (normal spoilage) Work-in-Process Control (Job #10)

1,610 8,540 10,150

Note: In developing the predetermined O/H rate, the budgeted manufacturing overhead would include expected normal spoilage costs. c) Journal entry for abnormal spoilage: Materials Control (spoiled goods at current disposal value) 7 × $230 Loss from Abnormal Spoilage 7 × $1,220 Work-in-Process Control (Job #10)

1,610 8,540 10,150

Note: If the spoilage is abnormal, the net loss is highlighted and always charged to an abnormal loss account.

18-36 (10 min.) Rework in job costing, journal entry (continuation of 18-35) a) Journal entry for rework related to a specific job: Work-in-Process Control (Job #10) Various Accounts (To charge rework costs to the job)

1,700 1,700

b) Journal entry for rework common to all jobs: Manufacturing Overhead Control (rework costs) Various Accounts

1,700

c) Journal entry for abnormal rework: Loss from Abnormal Rework Various Accounts

1,700

1,700

1,700

18-27 © 2012 Pearson Education, Inc. Publishing as Prentice Hall. SM Cost Accounting 14/e by Horngren

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18-37 (10 min.) Scrap at time of sale or at time of production, journal entries (continuation of 18-35) a) Journal entry for recognizing immaterial scrap at time of sale: Cash or Accounts Receivable 650 Scrap Revenues 650 (To record other revenue sale of scrap) b) Journal entry for recognizing material scrap related to a specific job at time of sale: Cash or Accounts Receivable 650 Work-in-Process Control (Job #10) 650 c) Journal entry for recognizing material scrap common to all jobs at time of sale: Cash or Accounts Receivable 650 Manufacturing Overhead Control 650 d) Journal entry for recognizing material scrap as inventory at time of production and recording at net realizable value: Materials Control 650 Work-in-Process Control (Job #10) 650 Cash or Accounts Receivable Materials Control (When later sold)

650 650

18-38 (20 25 min.) Physical units, inspection at various stages of completion (chapter appendix).

Work in process, beginning (20%)* Started during March To account for

Inspection at 15% 1,400 12,000 13,400

Inspection at 40% 1,400 12,000 13,400

Inspection at 100% 1,400 12,000 13,400

11,300a 660b 340 1,100 13,400

11,300a 744c 256 1,100 13,400

11,300a 678d 322 1,100 13,400

Good units completed and transferred out Normal spoilage Abnormal spoilage (1,000 – Normal spoilage) Work in process, ending (70%)* Accounted for

*Degree of completion for conversion costs at the dates of the work-in-process inventories a 1,400 beginning inventory +12,000 –1,000 spoiled – 1,100 ending inventory = 11,300. b 6% (12,000 units started – 1,000 units spoiled) = 6% 11,000 = 660; beginning work-in-process inventory is excluded because it was already 20% complete at March 1 and past the inspection point. c 6% (13,400 units – 1,000 ) = 6% 12,400 = 744, because all units passed the 40% completion inspection point in March. d 6% 11,300 = 678, because 11,300 units are fully completed and inspected during March.

18-28 © 2012 Pearson Education, Inc. Publishing as Prentice Hall. SM Cost Accounting 14/e by Horngren

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18-39 (30 35 min.) Weighted-average method, inspection at 80% completion (chapter appendix). The computation and allocation of spoilage is the most difficult part of this problem. The units in the ending inventory have passed inspection. Therefore, of the 100,000 units to account for (12,500 beginning + 87,500 started), 12,500 must have been spoiled in May [100,000 – (62,500 completed + 25,000 ending inventory)]. Normal spoilage is 8,750 [0.10 (62,500 + 25,000)]. The 3,750 remainder is abnormal spoilage (12,500 – 8,750). Solution Exhibit 18-39, Panel A, calculates the equivalent units of work done for each cost category. We comment on several points in this calculation: Ending work in process includes an element of normal spoilage since all the ending WIP have passed the point of inspection––inspection occurs when production is 80% complete, while the units in ending WIP are 95% complete. Spoilage includes no direct materials units because spoiled units are detected and removed from the finishing activity when inspection occurs at the time production is 80% complete. Direct materials are added only later when production is 90% complete. Direct materials units are included for ending work in process, which is 95% complete, but not for beginning work in process, which is 25% complete. The reason is that direct materials are added when production is 90% complete. The ending work in process, therefore, contains direct materials units; the beginning work in process does not. Solution Exhibit 18-39, Panel B, summarizes total costs to account for, computes the costs per equivalent unit for each cost category, and assigns costs to units completed (including normal spoilage), to abnormal spoilage, and to units in ending work in process using the weighted-average method. The cost of ending work in process includes the assignment of normal spoilage costs since these units have passed the point of inspection. The costs assigned to each cost category are as follows: Cost of good units completed and transferred out (including normal spoilage costs on good units) Abnormal spoilage Cost of ending work in process (including normal spoilage costs on ending work in process) Total costs assigned and accounted for

$2,346,687 84,638 917,675 $3,349,000

18-29 © 2012 Pearson Education, Inc. Publishing as Prentice Hall. SM Cost Accounting 14/e by Horngren

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SOLUTION EXHIBIT 18-39 Weighted-Average Method of Process Costing with Spoilage; Finishing Department of the Kim Company for August. PANEL A: Steps 1 and 2—Summarize Output in Physical Units and Compute Output in Equivalent Units (Step 1)

Flow of Production Work in process, beginning (given) Started during current period (given) To account for Good units completed and transferred out during current period: Normal spoilage on good units* 6,250 100%; 6,250 0%; 6,250 80% Work in process, ending‡ (given) 25,000 100%; 25,000 100%; 25,000 95% Normal spoilage on ending WIP** 2,500 100%; 2,500 0%; 2,500 80% Abnormal spoilage† 3,750 100%; 3,750 0%; 3,750 80% Accounted for Equivalent units of work done to date

Physical Units 12,500 87,500 100,000 62,500 6,250

(Step 2) Equivalent Units TransferredDirect Conversion in Costs Materials Costs

62,500 6,250

62,500 0

62,500 5,000

25,000 25,000

25,000

23,750

2,500 2,500

0

2,000

3,750

0

3,000

3,750 100,000 100,000

87,500

96,250

*Normal spoilage is 10% of good units that pass inspection: 10% 62,500 = 6,250 units. Degree of completion of normal spoilage in this department: transferred-in costs, 100%; direct materials, 0%; conversion costs, 80%. ‡ Degree of completion in this department: transferred-in costs, 100%; direct materials, 100%; conversion costs, 95%. **Normal spoilage is 10% of the good units in ending WIP that have passed the inspection point, 10% 25,000 = 2,500 units. Degree of completion of normal spoilage in this department: transferred-in costs, 100%; direct materials, 0%; conversion costs, 80%. † Abnormal spoilage = Actual spoilage Normal spoilage = 12,500 8,750 = 3,750 units. Degree of completion of abnormal spoilage in this department: transferred-in costs, 100%; direct materials, 0%; conversion costs, 80%.

18-30 © 2012 Pearson Education, Inc. Publishing as Prentice Hall. SM Cost Accounting 14/e by Horngren

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SOLUTION EXHIBIT 18-39 PANEL B: Steps 3, 4, and 5— Summarize Total Costs to Account For, Compute Cost per Equivalent Unit, and Assign Total Costs to Units Completed, to Spoiled Units, and to Units in Ending Work in Process Total Production TransferredCosts in Costs (Step 3)

(Step 4)

Work in process, beginning (given) Costs added in current period (given) Total costs to account for Costs incurred to date Divided by equivalent units of work done to date Cost per equivalent unit

$ 156,125 3,192,875 $3,349,000

Direct Materials

$103,625 809,375 $913,000

9.13

819,000 $819,000

$

52,500 1,564,500 $1,617,000

$819,000 87,500

$1,617,000 96,250

$

$913,000 100,000 $

Conversion Costs

$

9.36

$

16.80

(Step 5)

Assignment of costs Good units completed and transferred out (62,500 units) 62,500# ($9.13 + $9.36 + $16.80) Costs before adding normal spoilage $2,205,625 (0# $9.36) + (5,000# $16.80) Normal spoilage (6,250 units) 141,063 (6,250# $9.13) + (A) Total costs of good units completed and transferred out 2,346,688 (0# $9.36) + (3,000# $16.80) (B) Abnormal spoilage (3,750 units) 84,638 (3,750# $9.13) + Work in process, ending (25,000 units) WIP ending, before normal spoilage 861,250 (25,000# $9.13) + (25,000# $9.36) + (23,750# $16.80) (0# $9.36) + (2,000# $16.80) Normal spoilage on ending WIP 56,425 (2,500# $9.13) + (C) Total costs of ending WIP 917,675 + $819,000 + $1,617,000 (A)+(B)+(C) Total costs accounted for $3,349,000 $913,000

#

Equivalent units of transferred-in costs, direct materials, and conversion costs calculated in Step 2 in Panel A.

18-31 © 2012 Pearson Education, Inc. Publishing as Prentice Hall. SM Cost Accounting 14/e by Horngren

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18-40 (20 min.) Job costing, rework. 1.

2.

Manufacturing Overhead Control (rework costs) Materials Control ($12 50) Wages Payable ($9 50) Manufacturing Overhead Allocated ($15 50) Normal rework on 50 units, but not attributable to any specific XD1 job

1,800

Loss from Abnormal Rework ($36 30) Materials Control ($12 30) Wages Payable ($9 30) Manufacturing Overhead Allocated ($15 30) Total costs of abnormal rework on 30 units (Abnormal rework = Actual rework – Normal rework = 80 – 50 = 30 units) of XD1 chips.

1,080

600 450 750

360 270 450

Total rework costs for XD1 chips in August 2011 are as follows: Normal rework costs allocated to XD1 Abnormal rework costs for XD1 Total rework costs

$1,800 1,080 $2,880

3. Manufacturing costs of job #3879 before rework: 200 units ($60+$12+$38) $22,000 Add: Normal rework costs 1,800 Total cost of job #3879 $23,800 Unit cost of job (Total /200 units) $ 119 Work-in-Process Control (Job #3879) Materials Control ($60 200) Wages Payable ($12 200) Manufacturing Overhead Allocated ($38 200) Manufacturing costs for 200 units of XD1 on Job #3879 Work-in-Process Control (Job #3879) Materials Control ($12 50) Wages Payable ($9 50) Manufacturing Overhead Allocated ($15 50) Normal rework for 50 units of XD1 attributable to Job #3879

22,000 12,000 2,400 7,600

1,800 600 450 750

18-32 © 2012 Pearson Education, Inc. Publishing as Prentice Hall. SM Cost Accounting 14/e by Horngren

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18-41 Physical units, inspection at various levels of completion, weighted average process costing report 1. Work in process, beginning (40%)* Started during November To account for

Inspection at 30% 20,000 100,000 120,000

Inspection at 60% 20,000 100,000 120,000

Inspection at 100% 20,000 100,000 120,000

75,000a 10,200b 4,800 30,000 120,000

75,000a 12,600c 2,400 30,000 120,000

75,000a 9,000d 6,000 30,000 120,000

Good units completed and transferred out Normal spoilage Abnormal spoilage (15,000 – normal spoilage) Work in process, ending (70%)* Accounted for

*Degree of completion for conversion costs at the dates of the work-in-process inventories a 20,000 beginning inventory +100,000 –15,000 spoiled – 30,000 ending inventory = 75,000. b 12% (100,000 units started – 15,000 units spoiled) = 12% 85,000 = 10,200; beginning work-in-process inventory is excluded because it was already 40% complete at Nov 1 and past the inspection point. c 12% (120,000 units – 15,000 ) = 12% 105,000 = 12,600, because all units passed the 60% completion inspection point in November. d 12% 75,000 = 9,000, because 75,000 units are fully completed and inspected during November.

2. There are different amounts of normal and abnormal spoilage because the spoilage is detected at different points in the process. At the 30% inspection point, the beginning work in process inventory has already passed inspection and consists entirely of good units. At the 60% inspection point, the beginning work in process as well as units started this period must pass through the inspection point in the month of November. At the 100% inspection point, only the finished units have been inspected. Those in ending work in process have not yet been inspected. The finished units that are transferred out are good, but the others have not been inspected yet. Of course in all three cases the total spoilage is 15,000 units (given in the problem.) 3. Solution Exhibit 18-41 summarizes total costs to account for, calculates the equivalent units of work done to date for each cost category, and assigns total costs to units completed (including normal spoilage), to abnormal spoilage, and to units in ending work in process using the weighted-average method.

18-33 © 2012 Pearson Education, Inc. Publishing as Prentice Hall. SM Cost Accounting 14/e by Horngren

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SOLUTION EXHIBIT 18-41 Weighted-Average Method of Process Costing with Spoilage; Forging Department of Lester Company for November. PANEL A: Steps 1 and 2—Summarize Output in Physical Units and Compute Output in Equivalent Units (Step 1) Physical Units 20,000 100,000 120,000

Flow of Production Work in process, beginning (given) Started during current period (given) To account for Good units completed and transferred out during current period: Normal spoilage (at 60% inspection pt) 12,600 100%; 12,600 60% Abnormal spoilage (at 60% inspection pt) 2,400 100%; 2,400 60% Work in process, ending‡ (given) 30,000 100%; 30,000 70%a Accounted for Equivalent units of work done to date

a

(Step 2) Equivalent Units Direct Conversion Materials Costs

75,000

75,000

75,000

12,600

12,600

7,560

2,400

2,400

1,440

30,000

30,000

21,000

120,000

120,000

105,000

Degree of completion in this department: direct materials, 100%; conversion costs, 70%.

18-34 © 2012 Pearson Education, Inc. Publishing as Prentice Hall. SM Cost Accounting 14/e by Horngren

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SOLUTION EXHIBIT 18-41 PANEL B: Steps 3, 4, and 5— Summarize Total Costs to Account For, Compute Cost per Equivalent Unit, and Assign Total Costs to Units Completed, to Spoiled Units, and to Units in Ending Work in Process Total Production Costs $ 166,500 1,200,000 $1,366,500

(Step 3)

Work in process, beginning (given) Costs added in current period (given) Total costs to account for

(Step 4)

Costs incurred to date Divided by equivalent units of work done to date Cost per equivalent unit

(Step 5)

(A) (B) (C)

Assignment of costs Good units completed and transferred out (75,000 units) Costs before adding normal spoilage Normal spoilage (12,600# units, 7560# units) Total costs of good units completed and transferred out Abnormal spoilage (2,400# units, 1,440# units) Work in process, ending (30,000# units, 21,000# units)

Direct Materials $ 64,000 200,000 $264,000

Conversion Costs $ 102,500 1,000,000 $1,102,500

$264,000 120,000 2.20

$1,102,500 105,000 10.50

$

$

$ 952,500 (75,000 $2.20) + (75,000 10.50) 107,100 (12,600 2.20) + (7,560 10.50) 1,059,600 # 20,400 (2,400 2.20) + (1,440 10.50) 286,500 (30,000 2.20) + (21,000 10.50) $264,000 + $1,102,500 $1,366,500

(A)+(B)+(C) Total costs accounted for

#

Equivalent units of direct materials and conversion costs calculated in Step 2 in Panel A above.

18-35 © 2012 Pearson Education, Inc. Publishing as Prentice Hall. SM Cost Accounting 14/e by Horngren